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Changes to California’s net metering program and what they mean for solar PV system ROI

Changes to California’s net metering program and what they mean for solar PV system ROI

California’s net metering program, NEM 2.0, is being replaced with NEM 3.0 in early 2022. While there are still a lot of unknowns, net metering benefits could be changing – learn how this could impact your solar PV system investment.

California ranks first in the United States for installed solar capacity and has been a long-time champion for solar, and for good reason. The economic value that solar photovoltaic (PV) technology provides – due to robust solar policies, high electricity prices, and a wealth of sunshine – make installing a solar PV system a favorable energy option for organizations in California. In addition, the California Energy Commission (CEC), California Public Utilities Commission (CPUC) and California Air Resources Board (CARB) have set an aggressive goal for all of the state’s energy supply to be 100% carbon-free by 2045. This goal wouldn’t be achievable without sustaining record-breaking growth in installed solar capacity in the state over the next few decades.

One of the key drivers for solar adoption in California has been its strong net metering policy – one of the most important policy mechanisms for the California solar market over the past decade. Solar incentive programs like net metering are designed to “incentivize” adoption of solar PV systems, and generally, the earlier you adopt solar, the more lucrative the benefits – and the sooner you can begin reducing your grid consumption and offsetting it with less expensive, on-site generated renewable technology.

What is net metering for solar PV systems?

Understand how net metering works is important, as it applies to anyone who is considering going solar in California and is a customer of Pacific Gas and Electric (PG&E), San Diego Gas and Electric (SDG&E), and Southern California Edison (SCE). Net metering is a valuable solar incentive because unlike solar tax credits – like the Business Investment Tax Credit (ITC) – which provide a valuable one-time benefit of lowering the upfront cost of a solar PV system, net metering delivers on-going dividends over the lifetime of a solar PV installation. Under net metering, solar customers send their excess solar electricity to the grid – this usually happens when their solar PV system is generating more electricity than is being consumed at their site or when excess energy isn’t being stored in a battery energy storage system. The solar customer receives payment from their utility company for this excess solar energy in the form of bill credits that are applied to their monthly electric utility bill, lowering their future energy costs and operating expenses.

Net metering can help to speed up the payback period from installing a solar PV system by providing a continuous stream of credits month after month that – in combination with reduced grid consumption by generating renewable energy on-site – lower future electricity bills from the grid.

California is currently in its second version of the state’s net metering program, known as NEM 2.0. The three main utility providers in California – PG&E, SDG&E, and SCE – hit their net metering “cap” between 2016 and 2017, which prompted the CPUC (the governing body that regulates the electricity rates and services of California public utilities) to phase out NEM 1.0 and implement NEM 2.0. Compared with NEM 1.0, NEM 2.0 provides slightly less value for solar credits (only about 2 cents/kWh less), and despite that, the solar industry in California has continued to grow strongly.

In 2022, California will be releasing its third version of net metering, known as NEM 3.0. Bearing in mind that this is not the first time the state has adjusted its net metering policy, the proposed changes to net metering with this successor program to NEM 2.0 could be drastic this time – and may impact the payback and ROI from going solar in California.

How will proposed net metering changes affect solar PV system ROI?

The CPUC recently opened up discussions around NEM 3.0. Major parties and utility companies have submitted their proposals, and there is a lot for the state to decide on. At the current time, we are awaiting a decision from CPUC as to what NEM 3.0 will look like. That decision is expected in January 2022, with the expectation that NEM 3.0 could be rolled out in Q2 or Q3 of 2022.

There are a lot of unknowns with no indication as to what a final decision could look like; however, based on what is known so far, it is safe to assume that the value of going solar in California will be reduced. By exactly how much is not known at this time, but here are some of the proposals that utility companies have put forth to drastically modify the net metering program:

1.) Slashing the value of solar credits

The value of solar credits is facing a much more severe reduction with NEM 3.0 than when NEM 2.0 was implemented. The utility companies are proposing rates that would reduce the value of exported solar energy by an estimated 75%. This much lower value is the result of utilities recommending CPUC based export credits on “avoided cost” rates, which come out to about 25% of current rates (depending on the season and time of day).

2.) Implementing substantial monthly charges

Utilities are requesting new fees that, when combined, could cost PG&E, SCE and SDG&E solar customers potentially thousands of dollars per month. The fees are based on system size – the larger the system, the higher the fee. To demonstrate the impact of these fees, a 250 kW system would be charged an unavoidable monthly fee of $950 in the PG&E territory, $1,100 in the SCE territory, and $3,400 in the SDG&E territory – according to the California Solar and Storage Association (CALSSA)

3.) Preventing monthly rollover of credits

Under NEM 2.0, every 12 months, solar customers receive a True-Up Statement that provides their net energy charges and credits over the course of the entire year and any net balance due. This statement reflects the net difference between electricity bought from the grid and solar electricity sold to the grid through net metering. Proposals for NEM 3.0 are asking for a change from annual true-ups to monthly true-ups. This change would prevent solar customers from carrying any unused credits into the next month.

Decisions still need to be made

Again, these proposals are just that at the moment – proposals. There are many unknowns and a lot of decisions that the CPUC needs to make in order to frame NEM 3.0. We don’t know yet what the final numbers will be in terms of how much solar credits will be worth or what monthly fees (if any) will look like – and we likely won’t know until January 2022. However, the changes being proposed by utilities to the CPUC could lower the economic value of going solar in California by 50 to 75%. Payback periods could be increased, and ROI could be reduced.

If you want to secure the best economic value from going solar, it’s important to consider solar for your organization now so you can enroll into NEM 2.0.

The sooner you act, the greater the payback and ROI from your solar PV system

It’s important to note that even when NEM 3.0 is implemented, solar will still remain a great on-site renewable energy generation option that can help organizations become economically and environmentally sustainable. And they will still be able to earn net metering credits to lower their utility bills. Sunshine will always be a predictable energy source – unlike unpredictable electricity prices – enabling California organizations to save over the lifetime of their solar PV system. The solar ITC will still be in effect to reduce the upfront cost of going solar. And the net metering changes only impact the value of exported solar energy to the grid – you could install a battery energy storage system to store excess solar energy on-site and dispatch the battery during times of peak demand to reduce spend during those periods – maximizing the value of your solar energy and focusing efforts on self-consumption as opposed to exporting to the grid.

However, given all of the unknowns with NEM 3.0, and the proposed decrease in net metering credit value plus implementation of new monthly fees, solar is a more lucrative investment now under the NEM 2.0 program. If you are looking into installing a solar PV system in California, there will never be a more favorable time than the present. If you want to maximize your solar investment, decrease your payback period, and boost your ROI, it’s important to act sooner rather than later so that you are locked into the NEM 2.0 program before NEM 3.0 is implemented in early 2022 – as soon as March 2022.

It comes down to this – which option would you prefer for the next 20 years? The benefits that come with the more favorable NEM 2.0 program, or the unknown that comes with NEM 3.0 – which will likely lower the economic value of solar?

Both NEM 1.0 and NEM 2.0 customers benefit from grandfather clauses that lock solar customers into their net metering credit structure for 20 years, so if you invest in solar now and lock in NEM 2.0, you very likely will not have to worry about the potential impact of NEM 3.0 for a while.

Timing is essential if you want to secure your NEM 2.0 status. We can help you navigate this opportunity for your organization and strongly encourage you to begin the process now. This will ensure that there is plenty of time to learn about your organization’s goals, develop a custom solar PV system design, and prepare any necessary paperwork for interconnection to the grid. To help, we’ve put together a guide that provides a checklist along with key dates – to ensure you lock in NEM 2.0 rates and benefits before they expire. Download your copy below.

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